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How Suze Orman Got it Wrong
Suze Orman Hates Fire
In preparation for the interview, Paula went to her Facebook and Twitter audiences to crowd-source questions for Suze. This approach seems reasonable, considering Suze's long history of a common sense and realistic approach to finances for the masses.
The most popular question, and the one I would have wanted to ask as well, is if Suze had heard of the FIRE movement (and ultimately, what were her thoughts).
Suze is nothing if not incendiary. She went on to generalize the listening base, speak condescendingly, and use fear-mongering and hyperbole to "win" her arguments.
After listening to the interview in its entirety three times, I am convinced that Suze either does not understand the tenants behind the FIRE movement, or she cared more about inciting a strong response to sell her brand than to have a calm, rational and helpful discussion for her's and Paula's listeners.
Planning for catastrophe
"If a catastrophe happens, if something goes wrong, what are you going to to? You're going to burn up alive 'cause you won't have the money to do it."
Here is the crux of Suze's argument - early retirees have not given enough thought to the unknown. Medical bills, cost of living increases, downturns in the market - these are all landmines waiting to catch us unaware.
I mostly agree with Suze on this point that these events exist. No one knows the future, and it is entirely possible that chronic illness or a black swan event could cause irreparable damage to one's finances. I disagree when she asserts that no one is thinking about those possibilities.
Health insurance is among the top concern for those considering financial independence. Several blog posts are dedicated to the subject, and it's something I've pondered deeply even though we are likely years away from taking the early retirement plunge. Insurance is expensive, and will be much more so without a W2 job paying the bulk of the cost. It would be in everyone's best interest to continue talking about the options and looking for solutions, instead of shutting down discussion and resigning ourselves to working until we're 70.
How Suze says to be safe
Where Suze really loses me is in the discussion of a "safe" retirement amount. After bouncing around a bit with outrageous potential costs each year, Suze lands at $10-20 million dollars in pre-tax money so that you could safely withdraw $300-350 thousand dollars each year in a time of crisis. That is an enormous quantity of money to be considered "safe." Let's look at some figures.
According to data from the United States Census Bureau, individuals aged under 35 currently have $18,000 stashed away for retirement (and a net worth under $8k). This group is obviously no where near the threshold Suze would consider safe. They would need to save some 555 times what they currently have just in case of an emergency.
How long would this take? Assuming they save the average of their age bracket - 5.5%, make $50,000 per year, and the market returns 7% annually with 2.5% inflation, they will cross $10 million at the young age of...122.
Okay, okay. Let's cross out those making such a small amount of money. After all, the vast majority of 35 year old's actually make $100,000 or more**. Let's plug in those numbers, and assume they are making the higher average contribution of higher earners - 8.3%. Yes! I knew making more money would pay off! Now the earner can retire...just after their 107th birthday. Finally, you can live the life you've always dreamed of!
**A note to readers - this is my attempt at a joke. My wife says to stop making them because they're not funny, but she's wrong isn't she? Isn't she???
Here's my point. These numbers are very difficult to hit, and it requires an extraordinary contribution each year to make it happen. You must live frugally and be very intelligent with your money. If only there was a movement that promoted these tenants, one with a catchy acronym. I'll have to give that some thought.
Anyway, let's get back to reality. Having a net worth of $10 million actually places you in the top 1% of wealth in the United States. My conclusion if she is correct? Give up - it's impossible to ever retire.
Rise of the machines
Another point of contention was Suze's warning of the complete breakdown of social security, Medicare, and the job market all due to the rise of artificial intelligence replacing our work force. Again, I do not completely disagree with Suze when it comes to the prevalence of automation. Instead, I reject her outcome.
Where have we seen the highest rates of automation? In manufacturing. This is because it is often much more efficient to have a robot complete repetitive actions hundreds of times a day. Robots do not call in sick or require a lunch break. But you know what they do require? Design, maintenance, operation, engineering and many other jobs.
Robots are likely to replace humans in the jobs that don't require thought. Humans continue to be valued when critical thinking is needed, and that's a good thing. We want artificial intelligence to take over those jobs. Let me explain.
According to the U.S. Department of Labor Survey of Health Statistics in a 2012 study, repetitive strain injuries account for "34% of lost workday injuries and illnesses in the United States and cost on the order of $100 billion annually." Repetitive movement jobs are prime real estate for robots, reducing injuries and the associated medical costs.
Could a dystopian future where robots take over a la The Terminator happen? Maybe, but I am not going to base my future plans on the potential of Skynet, and I think Suze's words are the epitome of fear-mongering just shy of inciting a riot of angry mobs yelling "they took our jobs!"
Does retirement mean you're not allowed to work?
According to Suze, apparently.
There was a marked disdain that resembled a lecture from a concerned family member - when talking about some of her friends that are "multi-billionaires",
So many well-respected members of the FIRE community have iterated this point before, and I will join them now. FIRE is not about doing nothing. It is about having the freedom to choose the best life you can live, to follow your dreams, to make a difference in this world. It's about not waiting until you're 70 to begin living a fulfilled life, chasing lifestyle creep and never truly escaping the rat race. It's precisely about passion.
But simply having a passion does not mean you can follow it. If you're one of the few out there that found your passion right away, that's amazing. I cheer for you. I, unfortunately, did not. Don't get me wrong - my job is okay. It offers me satisfaction in many ways, but satisfaction is not the same as passion.
I am fond of the old thought experiment: if you had enough money that you no longer needed to work, what would you do with your time? For me, I'd become a teacher.
I love teaching people, molding young minds (and old minds when they listen), and having a lasting impact on the world. I love learning from others, an outcome that I believe to be automatic (provided you do not shut your mind to new thoughts). I remember those teachers who changed the course of my life. They were the ones who loved their jobs in spite of being grossly underpaid for their work. If money was no longer a concern, I would follow that passion.
Or, I might dive deeper into my businesses (Frugal Firefly and Etsy). Maybe I'd try my hand at YouTube videos or a podcast of my own. These are all ways that I have learned to create, another passion of mine. Maybe I could be a part-time teacher, part-time Firefly. Who knows? There is no end to my passion.
But to quit my job to follow a dream, with a wife and two little ones on the way? That is not a risk I am willing to take. I will gladly postpone my passions to a time when we are more financially stable. Then I can take that calculated risk, become a teacher (in whatever capacity makes sense), dive deeper into my businesses, and live the life I truly desire.
Frugal living - our path to fire
Achieving FIRE is about more than having a high paying job. In fact, it's not even mainly about that. FIRE is about reducing expenses to a much more responsible level. It's about making the tough choices now to live the life you want later. I've linked to him before and I'll do it again - do yourself a favor a read The Shockingly Simple Math Behind Early Retirement from Mr. Money Mustache.
This read is the ultimate eye-opener about FIRE.
My wife and I work hard on our expenses, even in the midst of having kids. Between this year and next year, we will have reduced spending by $18,000 (and that's with added expenses such as daycare which we did not have in 2018). In contrast, neither of us hoped to earn an $18,000 raise at work.
Living extraordinary later requires more than an ordinary life now, and that's what we're doing.
What if I fail?
Now let's return turn to the worst-case scenario above - the black swan event. Let's say Suze is right, and that 35-year old with two million in retirement has just pulled the trigger on early retirement only to wake up the next day to a stock market crash. Their portfolio is down 50%, and they are wondering if they can survive until their 90's now. Suze would say it's too late.
But let's take a step back. First, living the frugal life has already prepared said 35-year old for a different lifestyle. Instead of staring at a 30 year mortgage or a lease on that new Mercedes, this individual is debt-free and already knows how to live lean. They may reduce their spending to 3% or 2% of their portfolio instead of the 4% they planned.
The principles of FIRE make those early-retirees more prepared for the unknown.
Second, stock market crashes (and more commonly, recessions or re-balances) are normal. Most of you reading will remember the recession of 2007 - 2009. The S&P 500 was reduced to 50% of it's value in less than two years. And what has it done since? The market has rebounded and almost tripled the low of early 2009 (see graph below, courtesy of Google). That's eight years of a massive run. Early retirees understand and expect the market to move.
Let's look at our hypothetical early retiree with numbers:
I get that past performance is not a guarantee for the future, but this example illustrates a fairly bad scenario. The retiree lost 50% of their portfolio the day they retired. In response, they cut back their spending in year 0, helping to reduce the bleeding.
They could have also looked for other side projects to bring in additional income, especially in fields that recession-resistant. Course correction is normal - the FIRE group is not one to scream "the sky is falling."
Prepare, and then take calculated risks.
Which brings us to the third point. You can still get a job. Will it necessarily be easy? No. You may not be able to get a $100,000 job like you had before, but there are always lower-skilled, lower-pay jobs around (unless the robots actually do takeover).
You may have to "settle" for a lower-paying gig, but if this job is to help get through the tough times, and $30,000-$40,000 is all that is needed to live the life you want, you can afford to take a lower pay. I believe it was FI-180 who said "my worst case scenario is everyone else's everyday life."
The FIRE movement is growing quickly and now encompasses a diverse group in earnings, age, race, and gender. I suppose I should not be surprised that misconceptions exist. The draw of a "35-year old who has just retired financially independent" is a story too good to pass up. How did they do it and how can I? What's their secret?
There must be a secret.
There's no secret, folks. Or at lest none that taps into conspiracy theories or underhanded deals. Spend less, earn more, make smart decisions with your money, and look for ways to be just that much better than the next guy. That internal competition drives me.
t's why I started this website. I want to share with you all of my frugal wins. When I make mistakes, I'll share those details too.
Don't buy into the fear-mongering and reports of needing $10-20 million in retirement. We'll make it there together. This is a journey, a journey to your best possible life.
What did you think about the interview with Suze Orman? Did you think she had good points about FIRE or personal finance, or was she wildly off base?
What assumptions did you have about FIRE before joining the community? Or do you still believe, like Suze, that we are "making the biggest financial mistake" of our lives?
Let me know in the comments below!